The Facts

Five recent reports from experts from Arizona State University, Caltech and the University of Chicago Law School have looked into the costs of divestment at universities and the facts are in: Divestment is all cost and no gain.

UNIVERSITY OF CHICAGO LAW SCHOOL PROFESSOR FISCHEL FINDS DIVESTMENT WOULD COST PENSIONS TRILLIONS

A new report, authored by Prof. Daniel Fischel of the University of Chicago Law School, together with coauthors Christopher Fiore and Todd Kendall of the economic consulting firm Compass Lexecon, now puts a hard number on the real financial impact of divestment at 11 of the nation’s top pension funds, and the costs are staggering. Fischel’s report analyzes 11 of the nation’s top pension funds—including the largest state pension fund, the California Public Employees’ Retirement System (CalPERS) as well as municipal funds in New York City, Chicago and San Francisco to determine the financial impact of divesting. The results indicate that these funds would lose up to a combined $4.9 trillion over 50 years due to reduced portfolio diversification.

Key findings from the report include:

The weighted average portfolio of the 11 funds would have lost 7.1 percent due to narrow divestment and 9.3 percent due to broader divestment (including utilities) over the past 50 years. This translates to losses of $3.8 trillion in the narrow divestment approach, and $4.9 trillion in the broader divestment approach over the past 50 years for the group of 11 funds as a whole.

A divestment policy would hit California’s CalPERS fund the hardest, with reductions in returns ranging from $2.3 to $3.1 trillion over 50 years, and up to $290 million annually.

New York follows close behind, with the New York City Employee Retirement System (NYCERS) estimated to suffer between $502 and $692 billion in lower returns over 50 years. The annual impact for NYCERS ranges between $41 and nearly $60 million

These dollar amounts represent money that would be made unavailable to pay out pension recipients, and as a consequence, pensions would either need to slash payments to pensioners or seek other sources of funds, such as taxpayer bailouts, to compensate for the losses brought on by divestment.

To date, leading pensions from across the nation have said no to divestment activists who continue to push pension funds to divest from fossil fuels despite the impact such a decision may have on the retirees these funds support. This report is just one more piece of evidence why divestment is all cost and no gain for the people who rely on these funds.

When schools decide to divest, the financial hit their endowments take is both significant and ongoing – having a very real impact on these institutions’ ability to support critical student, faculty and academic programs.

Factor in all the losses incurred thanks to trading costs (1.65 percent), compliance costs (0.56 percent), and diversifications costs (0.23 percent), and the average endowment “hole” created by divestment results in a 15.2 percent drop in transfers from endowment accounts to school programs. That’s according to a new study authored by Prof. Hendrik Bessembinder of Arizona State’s Carey School of Business. What could a 15.2 percent annual reduction in endowment spending mean for the school, its students and its faculty?

Increases in annual tuition rates (or a reduction in existing scholarships) of as much as $3,265 per student per year

As much as an 11.5 percent reduction in faculty spending, which in turn could lead to fewer classes or increased class sizes

For pensions, a 5 to 7 percent reduction in monthly pension benefits for a typical pensioner.

As Prof. Bessembinder highlighted on the launch of the report, “Endowments are a vital financial resource for university spending. Due to the significant financial shortfall imposed by divestment, universities who choose such a strategy will have to make serious decisions on how to make up for this loss in funding or lower their endowment spend by increasing tuition, cutting faculty, or reducing on campus services.”

As activists push universities and pension funds to give up their holdings in fossil fuels, many groups have focused on the symbolic reasons to divest without considering the numerous financial impacts of such a decision. Now, a new report by Prof. Hendrik Bessembinder from Arizona State University’s Carey School of Business looks at the hidden costs that accompany divestment, specifically those fixed costs related to executing often-complicated transactions and then actively managing an endowment to ensure it remains compliant with ever-changing definitions of what it means to actually be “fossil-free.” A few of the top findings include:

Transaction and management costs related to divestment – what he refers to as “frictional costs” – have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe. This includes the onetime immediate transactions costs an endowment must endure, as well as ongoing annual management fees to stay in line with the changing definition of “fossil free.”

Focusing on a sample of 30 universities, including large, medium-sized, and small endowments, conservative estimates of these transaction costs range between 60 basis points and 269 basis points for large endowments, between 25 basis points and 180 basis points for medium endowments, and between nine basis points and 124 basis points for small endowments. Meanwhile, conservative estimates of ongoing annual compliance costs range between 8 basis points and 58 basis points.

For a typical large endowment, this would translate into a loss in value of as much as $7.4 billion over 20 years. For medium and small endowments the loss is equal to between $52 million and $298 million, and $17 million and $89 million respectively.

Since many endowments hold assets in mutual funds, commingled funds, and private equity funds, divestment generally requires the sale of an entire fund – not just its fossil fuel holdings. This imposes substantially larger transaction costs for endowments.

As Prof. Bessembinder highlighted on the launch of the report, “we don’t need a crystal ball to quantify the costs that divested institutions will be forced to bear by merely executing the necessary transactions. These costs have nothing at all to do with the speculative matter of how stocks or industries will do in the future. These are largely unavoidable costs, every institution that divests will incur them, and as my research shows, they significantly add up as time goes on.”

CALTECH’S PROFESSOR CORNELL INVESTIGATES COSTS OF DIVESTMENT AT LEADING UNIVERSITIES

As schools continue to reject calls to divest their endowments of fossil fuels, a new report quantifies for the first time the actual, real-world costs that individual, select schools could expect by divesting. Led by Caltech professor Dr. Bradford Cornell, the report looks into the real-world cost of divestment for five leading U.S. universities with significant endowments — Harvard, Yale, MIT, Columbia, and NY – by drawing on publicly available data to model thousands of different proxy portfolios for each school studied. Dr. Cornell and his team were then able to approximate the composition of each school’s investment fund, and then analyze those portfolios’ performance under both divested and diversified scenarios. A few of the top findings include:

Harvard, Yale, MIT, Columbia, and NY collectively could lose more than $195 million by divesting from fossil-fuel related equities – $195 million for each and every year the portfolios are active in the market.

Harvard would experience the most significant loss if it decided to divest – roughly $107 million per year. Yale’s losses are projected to exceed $51 million year per year. MIT would lose $17.75 million; Columbia would lose $14.43; and NYU would see a reduction of $4.16 million.

Divestment almost always generates long-term investment shortfalls due to reduced diversification, and the shortfalls are typically substantial, given the size and importance of the energy sector being divested.

Reductions in investment returns of these magnitudes would likely have a meaningful impact on universities’ ability to satisfy their institutional goals of research and education as endowments fund a material share of the operating budget for all five universities.

As Dr. Cornell highlighted upon release of the report, “The fact that divestment has the potential to generate lower returns for schools and other institutions isn’t particularly earthshattering news. But the fact that the projected shortfalls associated with divestment are this significant, and this universal – that is the real critical finding here, and one that schools would be smart to evaluate as part of any discussion on divestment moving forward.”

UNIVERSITY OF CHICAGO LAW SCHOOL PROFESSOR FISCHEL FINDS DIVESTMENT ALL COST, NO GAIN

Fossil fuel divestment targets institutions and universities to give up their investments in oil, natural gas, and other energy related companies. Yet this symbolic campaign comes at heavy price.As a recent groundbreaking report by University of Chicago Law School Professor Daniel Fischel found, colleges and universities that choose to divest can collectively expect to see billions of dollars evaporate from their endowment funds each year, all while being forced to pay hundreds of millions in new management fees to comply. A few of the top findings include:

Portfolios divested of energy equities produced returns 0.7 percentage points lower than ones that invested in energy on an absolute basis, representing a 23 percent loss over 50 years.

A decrease in portfolio performance of 0.7 percentage points on the roughly $456 billion that comprises total university endowment assets would decrease annual growth by nearly $3.2 billion each year.

Management fees for complying with divestment polices are much higher than those charged by traditional funds. An increase in compliance costs of just one percent on the estimated $22 billion of those endowments invested in energy stocks would further decrease growth by an additional $220 million per year.

There is no evidence of any discernable impact on the companies being targeted by divestment.

Bottom line: The only entities punished by fossil-fuel divestment are the schools actually doing the divesting. Check out the full reportand fact sheet from Professor Fischel, and visit the What They’re Saying page for more information on why institutions are saying no to this flawed campaign.

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All quotes featured by professors and school leaders on this website are public statements made by individuals and are not necessarily representative of the institution of which they are associated. Said schools and universities are also not affiliated with IPAA or DivestmentFacts.com.